the stock order forms were included to insure compliance with the OTS regulations. Shaw concludes the certifications are based solely on the prohibitions in section 563b.3(i)(1) and their truth or falsity must be determined through an analysis of that section.
The court rejects Shaw's contention. The stock order form contains a clear proscription against all agreements and understandings regarding the sale or transfer of the FirstRock stock, and the court declines to alter this language by incorporating a federal regulation. The stock order form may contain this proscription because of section 563b.3(i)(1), as Shaw notes. Nevertheless, there may be other federal regulations prohibiting different agreements which FirstRock intended to prevent without enumerating each specific, prohibited agreement. For example, Shaw admits the loan agreements contain an offer to sell the FirstRock stock to SCI. Yet, Shaw argues the agreements do not violate section 563b.3(i)(2) because the stock order forms contain no prohibitions regarding pre-conversion offers to sell the FirstRock stock and, therefore, no fraud was committed upon FirstRock. However, the stock order forms prohibit all agreements and understandings; this includes understandings to offer stock. By writing its stock order form in broad language, FirstRock avoids the necessity of articulating each federal regulation it is adhering to. The court finds the government need only plead and prove the elements of section 1344.
Kirschner argues the pledge agreement (which she alternatively refers to as a "loan" agreement) does not violate FirstRock's stock order form because nothing in its terms prohibited Naramore from borrowing money to purchase stock and pledging the stock as collateral. However, a factfinder is entitled to infer that the arrangement between Kirschner and Naramore was for the sale of the stock and that Naramore was not purchasing the stock on her own account. Kirschner's argument fails.
Likewise, Boosalis asserts the present dispute hinges, in part, on whether the "loan arrangement" between Teeters, Streit and himself is a "sale" or "transfer of the legal or beneficial ownership" of the stock based on the language of section 563b.3(i). This is incorrect. The issue is whether Teeters and Streit purchased stock on their own account and whether there existed an agreement or understanding regarding the sale or transfer of such shares, or their right to subscribe for shares. In other words, the issue is whether Teeters and Streit perjured themselves in signing the stock order form. This issue is for a factfinder, and Boosalis' argument is rejected.
C. Risk of loss
Shaw and Kirschner assert the conduct alleged in the complaint does not constitute bank fraud because FirstRock was not exposed to a risk of loss, nor was its financial integrity otherwise threatened. The majority of cases hold that a perpetrator's fraud need not cause a financial institution to suffer an actual loss for a valid conviction under section 1344. See United States v. Briggs, 965 F.2d 10, 12 (5th Cir. 1992) and cases cited therein, cert. denied, U.S. , 113 S. Ct. 1016, 122 L. Ed. 2d 163 (1993); United States v. Lemons, 941 F.2d 309, 316 n.3 (5th Cir. 1991). Rather, the majority of circuits hold that to support a conviction under section 1344, the government need only prove a risk of loss. See Briggs, 965 F.2d at 12-13 (exposure to civil liability sufficient to show bank suffered a risk of loss under section 1344); United States v. Stavroulakis, 952 F.2d 686, 694 (2d Cir.) (perpetrator's scheme to defraud bank must expose bank to actual or potential loss), cert. denied, U.S. , 112 S. Ct. 1982, 118 L. Ed. 2d 580 (1992); United States v. Young, 952 F.2d 1252, 1257 (10th Cir. 1991) (same); Lemons, 941 F.2d at 316 (government need only prove bank suffered risk of loss and not that an actual loss was incurred); Morgenstern, 933 F.2d 1108, 1114 (same). But see United States v. Blackmon, 839 F.2d 900, 906 (2d Cir. 1988) (fraud must threaten the financial integrity of a bank for purposes of section 1344).
The court believes the Seventh Circuit, if confronted with this issue, would endorse the majority view and hold that a scheme to defraud which exposes a bank to a risk of loss is sufficient to satisfy section 1344. As the Second Circuit noted in United States v. Stavroulakis, 952 F.2d 686, 694 (2d Cir. 1992), the bank fraud statute renders illegal an individual's attempt to defraud a bank. "It is worth emphasizing that the bank need not actually be victimized; the statute makes an individual criminally culpable for devising and executing or attempting to execute such a scheme with the intent to victimize the bank." Stavroulakis, 952 F.2d at 694; see also Solomonson, 908 F.2d 358, at 364.
The court finds that whether FirstRock was exposed to a risk of loss is a question for the factfinder to determine. The government argues FirstRock's failure to detect the alleged scheme could have exposed it to civil liability. Under OTS regulations, see 12 C.F.R. § 563b.3(i), and its conversion plan, FirstRock had a duty to initially offer its stock to eligible FirstRock depositors to the exclusion of outsiders. The alleged fraudulent orders in the instant case caused an oversubscription of shares, resulting in a reduction of shares available for eligible depositors. Had the alleged scheme been executed, the government argues, eligible depositors could have sued FirstRock for breaching its duty in issuing stock to fraudulent depositors.
The government's proposition is sufficient to withstand a motion to dismiss. Risk of exposure to civil liability satisfies section 1344, as stated above. Nor does the court believe the government's theory is highly speculative, as Shaw and Kirschner argue. Cf. United States v. Lankford, 573 F.2d 1051, 1053 (8th Cir. 1978) (bank owes a duty of care towards its customers regarding deposits in its custody and control). Shaw argues FirstRock was not exposed to any risk of loss because only eligible depositors purchased FirstRock stock. This argument presumes Shaw's conduct was legal, a presumption the court refuses to make at this stage.
Additionally, Shaw and Leichter argue FirstRock could not have suffered any risk of loss because had the alleged scheme not existed, FirstRock would have sold its stock to other depositors and received the same price.
However, implicit within this argument is the understanding that had claimants not become involved in the present alleged scheme, FirstRock would have been able to offer its stock to eligible depositors who had not executed agreements in violation of the stock order form. It was prevented from doing so because of the present claimants' involvement. Such a scheme does not require a resulting monetary loss; it is enough that FirstRock was deprived of the right to offer its stock to legitimate depositors. See Carpenter v. United States, 484 U.S. 19, 26, 98 L. Ed. 2d 275, 108 S. Ct. 316 (1987) (a scheme to defraud does not require a monetary loss; it was enough newspaper was deprived of its right to exclusive use of its confidential information); United States v. Walters, 711 F. Supp. 1435, 1445 (N.D. Ill. 1989) (business agents submitted false information to universities regarding student athletes; even if the universities would have paid out the same amount of money in athletic scholarships to other students, the universities were still defrauded by these particular student-athletes), rev'd on other grounds, 913 F.2d 388 (7th Cir. 1990).
Shaw argues Walters is inapplicable because the court found the universities would not have given scholarships to the students at issue had they known of the fraud. In the instant case, Shaw argues FirstRock knew of the alleged perpetrators. As the court noted earlier, this is a question of fact and inappropriate to resolve in this motion.
Additionally, Shaw ignores the potential liability FirstRock may have faced from OTS had the alleged scheme been executed. Factual issues exist as to FirstRock's potential liability if OTS had determined the agreements at issue violated its regulations. OTS is responsible for administering and enforcing, the Home Owners' Loan Act of 1933, 12 U.S.C. § 1461 et seq., the Federal Deposit Insurance Act, 12 U.S.C. § 1811 et seq., the Bank Protection Act of 1968, 12 U.S.C. § 1881 et seq., the Truth in Lending Act, 15 U.S.C. § 1601 et seq., and the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq. 12 C.F.R. § 500.1 (1993). Under its regulations, OTS has the authority, inter alia, to institute cease-and-desist and/or change-in-control proceedings, or assess civil money penalties for violations of these acts. 12 C.F.R. § 509.1 (1993).
While the court makes no finding as to whether the instant case would warrant such sanctions, questions of fact exist as to whether the disputed agreements would have potentially subjected FirstRock to such measures.
Shaw argues the applicability of section 1344 in the instant case would extend section 1344 beyond the bounds congress intended. The court disagrees. Section 1344(2) was modeled after the wire and mail fraud statutes and reaches a wide range of fraudulent activity. Lemons, 941 F.2d at 314. The existence of section 563b.3(i) lends credence to the notion that section 1344 liability is appropriate in the instant case.
Shaw argues the shares issued to "Grant" are not "proceeds" within the meaning of the civil forfeiture statute, 18 U.S.C. § 981(a)(1)(C) (Supp. 1993) and, therefore, are not subject to forfeiture.
Shaw argues the use of the word "proceeds" in section 981 contemplates successful completion of the scheme. The court rejects this interpretation of section 981. First, as the government notes, Shaw's reading of section 981 would effectively obviate that portion of section 1344 which forbids an attempt to defraud a bank.
Second, Shaw ignores the complete language of the forfeiture statute. Section 981 authorizes the government to seize property which constitutes a violation of section 1344, as well as proceeds traceable to such a violation. See 18 U.S.C. § 981(a)(1)(C) (Supp. 1993). In the instant case, the stock is the property which constitutes a violation of section 1344. In adopting this interpretation, the court rejects for the purposes of this motion Leichter's assertion that section 981 only allows the government to seek forfeiture of the claimants' profits. On the contrary, section 981 authorizes the government to seize the res as well as any proceeds. Here, the res is the stock.
For the reasons stated above, Shaw's motion to dismiss is denied.
In her memorandum in support of her motion for summary judgment and again in her motion to dismiss, Kirschner also argues the $ 211,600 she loaned to Naramore was not "proceeds" of a bank fraud. Kirschner's argument is premised on the theory that by seeking forfeiture of the shares, the government is effectively seeking forfeiture of her money. In so arguing, Kirschner ignores the nature of an in rem proceeding. Forfeiture actions proceed on the legal fiction that inanimate objects themselves are guilty of wrongdoing, which is reflected in the object being the formal defendant. United States v. On Leong Chinese Merchants Ass'n Bldg., 918 F.2d 1289, 1293 (7th Cir. 1990), cert. denied, U.S. , 112 S. Ct. 52, 116 L. Ed. 2d 29 (1991). The government has seized the FirstRock stock, not the money Kirschner loaned to Naramore. Kirschner's argument is without merit.
IV. Kirschner's motion for summary judgment
Kirschner seeks to invoke in her motion for summary judgment the "innocent owner" defense set forth in section 981. According to section 981(a)(2):
No property shall be forfeited under this section to the extent of the interest of an owner or lienholder by reason of any act or omission established by that owner or lienholder to have been committed without the knowledge of that owner or lienholder.